A Lender Halts U.S.-Backed Student Loans

Jonathan D. Glater|The New York Times

Thursday, 28 Feb 2008 | 9:27 AM ETThe New York Times

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The Pennsylvania Higher Education Assistance Agency, one of the nation’s largest student loan operations, announced Wednesday that it would suspend making federal-guaranteed loans starting early next month.

The move offered further evidence of how the tight credit markets are affecting the industry, with some lenders warning that it could be more difficult and more costly for many students to obtain college loans for the 2008-9 academic year.

“Widespread lack of confidence in the capital market has spilled over into other asset classes, driving up our cost of borrowing and denying us the capital needed to fund new student loans,” said James Preston, the interim chief executive of the Pennsylvania lender, a state-owned company that both makes and guarantees loans.

Such loan operations have been dealing with two problems. Congress reduced subsidies to lenders in the federal-guaranteed student loan program. In addition, investors have recently shied away from purchasing securities backed by student loans, making it more costly for the lenders to raise the capital they need.

As a result, some lenders have curtailed their activities. The College Loan Corporation, a large lender, announced that it was leaving the federal loan program.

The Missouri Higher Education Loan Authority, a state-created company that buys student loans from partners, has temporarily stopped offering private loans, which are not guaranteed by the government, and federal consolidation loans, which allow borrowers to combine multiple federal loans into a single payment. A Michigan agency recently suspended its private loan program, too.

And Sallie Mae, the largest student lender, has tightened loan standards in what could be a blow to commercial colleges and their students.

Members of Congress have asked the Treasury and Education Departments to monitor whether it will become harder for students to borrow.

“If the marketplace does not improve shortly or we do not take steps to ensure liquidity, then our students will be the ultimate losers,” Representative Christopher Shays, Republican of Connecticut, wrote in a letter Tuesday to Henry M. Paulson Jr., the secretary of the Treasury, and Margaret Spellings, the secretary of education.

But while Education Department officials acknowledge the uncertainty in the credit markets, they have repeatedly said that students should have no trouble obtaining a federal loan to pay for college.

The under secretary for higher education, Sara Martinez Tucker, said in a telephone interview Wednesday, “We have today 2,253 lenders that are active in originating loans, so to the extent that some lenders pull away form some markets or some schools, other lenders have been able to” step up.

The Pennsylvania agency directed students to other lenders. “From a student perspective, there should be no disruption or difficulty,” said William F. Adolph, chairman of the agency’s board.

Kevin Bruns, executive director of America’s Student Loan Providers, a trade group, remarked that over all, “the sky is not falling,” but “there are some pretty dark clouds.”

He said there could be disruptions in the student loan market in some parts of the country that would force students who already had loans to seek new lenders for the next academic year.

Some agreed with the Education Department that students would not face problems next fall.

“This is a crisis more for lending institutions than for students,” said Luke Swarthout, a specialist in higher education at the United States Public Interest Research Group.

And there were lenders who appeared to be seeking business. JPMorganChase is expanding its student loan business; last fall, the company hired 140 employees away from Nelnet, another loan company, a Chase spokesman, Tom Kelly said.

Mr. Kelly said that because Chase’s business is broad-based, it could hold on to student loans rather than sell them, giving it an advantage over less diversified lenders. “We do think student lending is an important business for us long term,” he added.

Andrea Murad, senior director in the asset-backed securities group at Fitch Ratings, said it was surprising that the tightness in credit markets had affected even securities backed by loans guaranteed by the federal government.

“From a credit perspective, you have a very strong asset,” Ms. Murad said. It may be, she added, that “there’s a little bit of unfamiliarity with the market.”